It’s been about 2 weeks since my last posting, so let’s get right to it. In the past I’ve said many, many times that rising interest rates would lead to higher default rates on all types of loans, both consumer/household loans as well as commercial loans to businesses and commercial real estate.
About 3-4 weeks ago I spoke about the alarming amounts of student debt as well as the default rates. Today instead, I want to look at two types of loans at the consumer or household level. One is auto loans in default. There’s actually a lot of talk as of late regarding the over 7 million auto loans that are now at least 90 days late, which is 3 monthly payments. That’s a lot of loans, and it’s particularly alarming because people really need their cars to go to work, run ordinary errands like grocery shopping, and basically live their lives as they are accustomed to do. So before the house, it’s probably the last loan that people default on when they’re getting desperate. And the default rate hasn’t been this high since the depths of the great recession. If the economy was as good as the government claims, we shouldn’t see this many defaults like we did at the depths of the last recession.
Two weeks ago Fed chairman Jerome Powell said in a 60 Minutes interview that the number of auto loan defaults is so historically high because the economy has been so good that people have bought a historically high number of cars. Au contraire Mr Chairman, the auto industry is reporting sinking sales, some by as much as 25% or more during 4Q18, as I have spoken about recently. And auto sales aren’t nearly what they were 15 years ago, down by 40%. Car sales aren’t historically high by any means, whereas defaults in a so-called good economy are.
According to carsalesbase.com, one of the worst is Nissan which sold 629,621 cars fleet-wide for the last 6 months, and the same period one year prior they sold 714,722 cars. That’s 12% less. Honda results were also down with 671,838 in the last 6 months and 699,348 one year prior, for a 4% drop. Toyota was 987,310 for the last 6 months and 1,030,054 one year prior for a drop of 4.1%. Ford was 1,107,723 and 1,175,880, for a fall of 5.8% It’s more likely that salaries are just not keeping pace with living expenses as those expenses rise with rate hikes.
The second area of loan defaults is completed mortgage foreclosures. Remember that a foreclosure happens when the homeowner defaults on their mortgage and the bank takes away the house. The whole process can take anywhere from 9 months to several years, depending on the state law and the particular situation.
Last week there was an article on Zero Hedge citing a newly released study from ATTOM Data Solutions showing that 60 of 220 major metropolitan areas showed a year over year increase in foreclosure activity this past January. Total foreclosure starts were up to 29,382, which was up by 4% over December and up over 2% from the prior January 2018. The worst offender was Florida, with new foreclosures up by 91% from a year earlier. And completed foreclosures totaled 12,228 homes. Though that is down from the same period in 2017, it was up 18% from December 2018 and marked the third month in a row that foreclosures ticked up.
Again, all this is likely due to rising interest rates combined with well over-leveraged consumers who can’t pay student loans, auto loans, home loans, and other debts they owe. This is also the likely reason that December retail sales were negative and January was up but not anything near what was expected. None of this bodes well for the economy. We may not be in recession yet, but we are surely inching closer and closer.
Thanks for reading Volume 63 of The Macro Market Wrap Up With The Mad Genius. Make sure to leave your comments and questions down below. And remember there is always a bull market somewhere in the world, and on the opposite side of every crises there lies opportunity.
#economics #investing #ratehikes #default #recession
